4 - Legally binding the company

Question 1

3 ways by which company can enter contract

Answer 1

• Affixing its common seal to a document
• By a person who has authority to contract on company’s behalf
• By complying with rules in S.44(2)

Question 2

What decides who may use a common seal, and how it is used?

Answer 2

The company’s articles

Question 3

What do model article say on use of common seal?

Answer 3

Can only be used with directors’ authority, and the document to which it is affixed should also be signed by an authorised person

Question 4

Though it is not still a legal requirement, which companies may retain common seal?

Answer 4

Those that trade internationally, due to requirements in other countries

Question 5

When is a document validly executed by a company? (2)

Answer 5

• Signed by two authorised signatories
  or
• Singed by a director in the presence of a witness

Question 6

Who are automatically authorised signatories?

Answer 6

Directors and CoSec

Question 7

What makes up company’s constitution?

Answer 7

• Articles
• Resolutions and agreements affecting constitution
• Memorandum (technically not but it used to)

Question 8

What does post-CA2006 memorandum state?

Answer 8

Subscribers wish to form company, agree to become members, and agree to take at least one share each

Question 9

Example of statutory rule which can be excluded or modified by articles

Answer 9

Pre-emption rights

Question 10

3 areas which articles establish rules and procedures on

Answer 10

• Directors (powers, responsibilities, appointment, removal)
• Meetings (board and members)
• Capital (allotments, dividends, borrowing powers)

Question 11

3 sets of model articles

Answer 11

• Private limited by shares
• Private limited by guarantee
• Public companies

Question 12

4 choices for promoter of private limited by shares co - articles

Answer 12

• Model articles in full
• Own articles, adopting all terms of model articles
• Own articles, adopting some of model articles and modifying or excluding others
• Own articles, completely excluding model articles

Question 13

To what degree can and cannot courts interpret articles?

Answer 13

They can imply terms into the articles, but they cannot add words to make them fairer or more reasonable

Question 14

What is the confusion regarding implying terms into the articles?

Answer 14

Disagreement between courts on whether terms can be implied on reasonableness, or only on necessity

Question 15

How are articles amended?

Answer 15

By special resolution (or in limited cases, if ordered to do so by the courts)

Question 16

2 notable limitations on amending articles

Answer 16

• Restricted by statute
• Restrictions imposed by court

Question 17

Example on restriction to amend articles by statute

Answer 17

Requirement of higher majority or even unanimity

Question 18

4 limitations/consequences imposed by court on alteration of articles

Answer 18

• Amendment is invalid if it deprives member of right that already occurred
• Invalid if not for the benefit of the company as a whole
• Company cannot contract out of ability to alter its articles
• Liable for breach of contract if amendment to articles breach separate contract

Question 19

The constitution of a company is a contract between who?

Answer 19

• The company and its members
  and
• The members themselves

Question 20

What is the S.33 contract?

Answer 20

The constitution

Question 21

3 consequences of S.33 contract forming contract between company and its members, and members themselves (breaches of contract)

Answer 21

• Company can sue a member if member breaches
• Member can sue the company if company breaches
• Member can sue another member for breach

Question 22

2 limits on ability of company and its members to enforce constitution

Answer 22

• Outsiders and outsider rights
• Internal irregularities

Question 23

Outsiders and outsider rights - limits re. articles

Answer 23

Outsiders cannot enforce constitution (by making claim), nor can a member do so on behalf of an outsider
There is an exception

Question 24

When can constitution be enforced by outsider?

Answer 24

If separate agreement outside of constitution allows for such enforcement

Question 25

Internal irregularities - limits re. litigation

Answer 25

Result of 'principle majority' rule - prevents one individual from frustrating wishes of company as litigation cannot be brought on internal matters where a majority of shareholders could have prevented occurence

Question 26

Relationship between shareholders' agreements and articles

Answer 26

Shareholders' agreements do not form part of constitution but do supplement it

Question 27

What is a shareholders' agreement?

Answer 27

An agreement entered into by two or more members, setting out certain rules regarding relationship of those members

Question 28

Shareholders agreements are typically only used by which companies

Answer 28

Those with a small amount of members

Question 29

3 advantages to placing certain rights in shareholders' agreement, as opposed to articles

Answer 29

- Confidential - All the terms of agreement bind all the parties to it - therefore avoiding inability to enforce outsider rights as in articles - All parties must agree to amendment rather than majority

Question 30

What is meant by a company's contractual capacity?

Answer 30

A company's ability to enter into contracts

Question 31

What is meant if a company is acting 'ultra vires'?

Answer 31

It is exceeding its contractual capacity

Question 32

How can a company's contractual capacity be limited or restricted?

Answer 32

By its constitution

Question 33

Which directors duty is breached if directors are acting ultra vires?

Answer 33

171(a)

Question 34

Historically, how was a company's contractual capacity (and capacity more generally) restricted?

Answer 34

Through an objects clause in the memorandum

Question 35

2 key issues arising from ultra vires doctrine/objects clause

Answer 35

- Restricted objects - Effects on innocent third parties (as contracts became void)

Question 36

How was 'restricted objects' issue with corporate capacity overcome?

Answer 36

CA 2006 - removing the need for an objects clause in the memorandum, meaning that a company's objects become unrestricted

Question 37

How was 'effects on innocent third parties' issue with corporate capacity overcome?

Answer 37

CA 2006 - provided that a contract cannot be invalidated on grounds that is outside the scope of a company's contractual capacity

Question 38

Has the ultra vires doctrine now been abolished? S.39(1)

Answer 38

From the view of third parties, yes From the view of directors and members, no, as they can still be found to be in breach of duty and sued via a derivative claim

Question 39

Two principal types of authority

Answer 39

- Actual authority - Apparent authority

Question 40

Define actual authority

Answer 40

A legal relationship between the principal and agent ascertained through applying ordinary principles in construction of contracts

Question 41

Two types of actual authority

Answer 41

- Express actual authority - Implied actual authority

Question 42

Example of express actual authority

Answer 42

Model arts conferring authority upon an agent to engage in specified acts

Question 43

2 instances where agent may be found to have implied actual authority

Answer 43

- Agent has implied actual authority to engage in activities incidental to another activity for which he has express actual authority - Being effectively appointed into role without formal appointment

Question 44

Define apparent authority

Answer 44

The authority of an agent as it appears to others

Question 45

3 requirements that need to be satisfied to establish an agent's apparent authority & brief explanation of each

Answer 45

- There must be a representation (ie. agent is presented as being in a certain position, eg. MD) - That representation must be relied upon (third party are aware of representation, and are not aware of lack of authority) - The person relying on the representation must alter their position (eg. entering into contract)

Question 46

Which S of CA2006 is re. enforcement of ultra vires contracts?

Answer 46

S.40

Question 47

Who/what is and isn't protected by S.40?

Answer 47

The contract is (and therefore third parties are) protected The directors are not

Question 48

2 considerations re. S.40

Answer 48

- Third party must have acted in good faith - Third party not bound to enquire as to any limitation on powers of directors to bind company

Question 49

When is a third party considered to have acted in good faith re. S.40?

Answer 49

They are presumed to unless the contrary is proved

Question 50

When does S.40 rule become more complex?

Answer 50

When a director enters into a contract, on behalf of the company, with himself

Question 51

Transactions with whom will be voidable at the company's instance, in spite of S.40?

Answer 51

- A director of the company - Any person connected with a director Director that authorised transaction is liable to account for any gain and to indemnify company

Question 52

Can S.40 rule apply to actions of one director, or must it be directors?

Answer 52

Probably directors but clarification needed

Question 53

What can third parties use if S.40 does not apply?

Answer 53

'Indoor management' rule

Question 54

What is the 'indoor management' rule?

Answer 54

Third parties that deal with company can assume company's internal rules have been complied with

Question 55

2 key case laws to reference for share expropriation provisions

Answer 55

Dafen Tinplate Co Ltd v Llanelly Steel Co - where such a provision is overly wide, it is likely to be deemed to be invalid Sidebottom v Kershaw Leese & Co Ltd - where a provision is more limited in scope, it may be deemed valid - provision empowered Board to purchase shares of any shareholder who competed with the company

Question 56

What is the most significant of the limitations imposed by the court on a company's ability to amend its articles? Which case?

Answer 56

Allen v Gold Reefs of West Africa The power to alter articles must be exercised not only lawfully, but also 'bona fide for the benefit of the company as a whole' Company means corporate entity.

Question 57

What is meant by bona fide? 'bona fide for the benefit of the company as a whole'

Answer 57

If members honestly believed the amendment is for the benefit of the company as a whole